A transaction tax is not a levy on financial institutions per se; rather, it is charged only on the specific transactions that are designated as taxable. So if an institution never carries out the taxable transaction, then it will never be subject to the transaction tax.[2] Furthermore, if an institution carries out only one such transaction, then it will only be taxed for that one transaction. As such, this tax is neither a financial activities tax (FAT), nor a Financial stability contribution (FSC), or "Bank tax",[3] for example. This clarification is important in discussions about using a financial transaction tax as a tool to selectively discourage excessive speculation without discouraging any other activity (as John Maynard Keynes originally envisioned it in 1936).[4]

There are several types of financial transaction taxes. Each has its own purpose. Some have been implemented, while some are only proposals. Concepts are found in various organizations and regions around the world. Some are domestic and meant to be used within one nation; whereas some are multinational.[5] In 2011 there were 40 countries that made use of FTT, together raising $38 billion (€29bn).[6][7]

History of the concept

The year 1694 saw an early implementation of a financial transaction tax in the form of a stamp duty at the London Stock Exchange (founded 1801). The tax was payable by the buyer of shares for the official stamp on the legal document needed to formalize the purchase. As of 2011, it is the oldest tax still in existence in Great Britain.[8]

In 1936, in the wake of the Great Depression, John Maynard Keynes advocated the wider use of financial transaction taxes.[4][9] He proposed the levying of a small transaction tax on dealings on Wall Street, in the United States, where he argued excessive speculation by uninformed financial traders increased volatility (see Keynes financial transaction tax below).

Purpose

Although every financial transaction tax (FTT) proposal has its own specific intended purpose, there are some general intended purposes which are common to most of them. Below are some of those general commonalities. The intended purpose may or may not be achieved.

Curbing volatility of financial markets

In 1936, when Keynes first proposed a financial transaction tax, he wrote, "Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation."[14] Rescuing enterprise from becoming "the bubble on a whirlpool of speculation" was also an intended purpose of the 1972 Tobin tax[15][16][17][18][19] and is a common theme in several other types of financial transaction taxes. For the specific type of volatility in specific areas, see each specific type of financial transaction taxes below. An exception to the purpose of "curbing of volatility" is likely the "bank transaction tax".

More fair and equitable tax collection

Another common theme is the proposed intention to create a system of more fair and equitable tax collection. The G20 nations, the International Monetary Fund (IMF) delivered a report in 2010 titled "A Fair and Substantial Contribution by the Financial Sector" which made reference to a financial transaction tax as one of several options.[21][22]

According to several leading figures, the "fairness" aspect of a financial transaction tax has eclipsed, and/or replaced, "prevention of volatility" as the most important purpose for the tax. Fraser Reilly-King of Halifax Initiative is one such economist.[23] He proposes that an FTT would not have addressed the root causes of the United States housing bubble which, in part, triggered the financial crisis of 2007–2010. Nevertheless, he sees an FTT as important for bringing a more equitable balance to the taxation of all parts of the economy.[23]

Types of financial transaction taxes

Transaction taxes can be raised on the sale of specific financial assets, such as stock, bonds or futures; they can be applied to currency exchange transactions; or they can be general taxes levied against a mix of different transactions.[4]

Securities transaction tax

John Maynard Keynes was among the first proponents of a securities transaction tax.[4] In 1936 he proposed that a small tax should be levied on dealings on Wall Street, in the United States, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes, the key issue was the proportion of 'speculators' in the market, and his concern that, if left unchecked, these types of players would become too dominant.[4] Keynes writes: "The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States. (1936:159–60)"[4]

Currency transaction tax

A currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. The most frequently discussed versions of a currency transaction tax are the Tobin tax and Spahn tax.

Tobin tax

In 1972 the economist James Tobin proposed a tax on all spot conversions of one currency into another. The so-called Tobin tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system effectively ended.[10] In 2001, James Tobin looked back at the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, and said: "[My proposed] tax [idea] on foreign exchange transactions... dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, South East Asia and Russia have proven...."[15][16][17][18]

Spahn tax

Paul Bernd Spahn opposed the original form of a Tobin Tax in a Working Paper International Financial Flows and Transactions Taxes: Survey and Options, concluding "...the original Tobin tax is not viable. First, it is virtually impossible to distinguish between normal liquidity trading and speculative noise trading. If the tax is generally applied at high rates, it will severely impair financial operations and create international liquidity problems, especially if derivatives are taxed as well."[12][13] However, on 16 June 1995 Spahn suggested that "Most of the difficulties of the Tobin tax could be resolved, possibly with a two-tier rate structure consisting of a low-rate financial transactions tax and an exchange surcharge at prohibitive rates."[12][13] This new form of tax, the Spahn tax, was later approved by the Belgian Federal Parliament in 2004.[28]

Special Drawing Rights

On 19 September 2001, retired speculator special drawing rights (SDR) that the rich countries would pledge for the purpose of providing international assistance and the alleviation of poverty and other approved objectives. According to Soros this could make a substantial amount of money available almost immediately. In 1997, IMF member governments agreed to a one-time special allocation of SDRs, totaling approximately $27.5 billion. This is slightly less than 0.1% of the global GDP. Members having 71% of the total vote needed for implementation have already ratified the decision. All it needs is the approval of the United States Congress. If the scheme is successfully tested, it could be followed by an annual issue of SDRs and the amounts could be scaled up "so that they could have a meaningful impact on many of our most pressing social issues".[29]

Bank transaction tax

Between 1982 and 2002 Australia charged a bank account debits tax on customer withdrawals from bank accounts with a cheque facility. Some Latin American countries also experimented with taxes levied on bank transactions. Argentina introduced a bank transaction tax in 1984 before it was abolished in 1992. Brazil implemented its temporary "CPMF" in 1993, which lasted until 2007. The broad based tax levied on all debit (and/or credit) entries on bank accounts proved to be evasion-proof, more efficient and less costly than orthodox tax models.[30]

Automated payment transaction tax

In 1989, Edgar L. Feige proposed a synthesis and extension of the ideas of Keynes and Tobin by proposing a flat rate tax on all transactions.[31] The total volume of all transactions undertaken in an economy represents the broadest possible tax base and therefore requires the lowest flat tax rate to raise any requisite amount of revenue. Since financial transactions in stocks, bonds, international currency transactions and derivatives comprise most of the automated payment transaction (APT) tax base, it is in essence the broadest of financial transaction taxes. Initially proposed as a revenue neutral replacement for the entire Federal tax system of the United States,[32] it could alternatively be considered as a global tax whose revenues could be used by national governments to reduce existing income, corporate and VAT tax rates as well as reducing existing sovereign debt burdens. If adopted by all of the developed nations, it would have the advantage of eliminating all incentives for substitution between financial assets and between financial centers since all transactions would universally be taxed at the identical flat tax rate.

Implemented financial transaction taxes

In 2011 there were 40 countries that had FTT in operation, raising $38 billion (€29bn).[6]

Belgium

The Belgium securities tax applies to certain transactions concluded or executed in Belgium through a Belgian professional intermediary, to the extent that they relate to public funds, irrespective of their (Belgian or foreign) origin. The "tax on stock exchange transactions" is not due upon subscription of new securities (primary market transactions). Both buyers and sellers are subject to the tax. The tax rate varies in accordance with the type of transactions. A 0.07% tax (subject to a maximum of €500 per transaction) is charged for distributing shares of investment companies, certificates of contractual investment funds, bonds of the Belgian public debt or the public debt of foreign states, nominative or bearer bonds, certificates of bonds, etc. A 0.5% tax (subject to a maximum of €750 per transaction) is charged for accumulating shares of investment companies and 0.17% (subject to a maximum of €500 per transaction) for any other securities (such as shares). Transactions made for its own account by non-resident taxpayers and by some financial institutions, such as banks, insurance companies, organizations for financing pensions (OFPs) or collective investment are exempted from the tax.[33]

Finland

Finland imposes a tax of 1.6% on the transfer of certain Finnish securities, mainly equities such as bonds, debt securities and derivatives. The tax is charged if the transferee and/or transferor is a Finnish resident or a Finnish branch of certain financial institutions. However, there are several exceptions. E.g. no transfer tax is payable if the equities in question are subject to trading on a qualifying market.[33] Prime Minister [36]

France

On 1 August 2012, France introduced a financial transaction tax in French tax regulation pursuant to Article 5 of the French Amended Finance Bill of 14 March 2012. Two other taxes applicable to financial transactions were also introduced, including a tax on high-frequency trading, (Article 235 ter ZD bis of the FTC); and a tax on naked sovereign credit default swaps (Article 235 ter ZD ter of the FTC). The FTT levies a 0.2 percent tax on stock purchases of French publicly traded companies with a market value over €1 billion. The scheme does not include debt securities, except convertible and exchangeable bonds, which are included but benefit from a dedicated exemption to the FTT.[37] According to French president Francois Hollande the tax will generate €170 million in additional revenue for 2012 and another €500 million in 2013.[38] France is the first European country to impose a transaction tax on share purchases.[39]

Greece

Listed shares acquired as of 1 January 2013 will no longer be subject to the sales tax; rather, any capital gains received will be added to the taxpayer's total income.[33]

India

Since 1 October 2004 India levies financial transaction taxes of up to 0.125% payable on the value of taxable securities transaction made through a recognized national stock exchange. The securities transaction tax (STT) is not applicable on off-market transactions. The tax rate is set at 0.125% on a delivery-based buy and sell, 0.025% on non-delivery-based transactions, and 0.017% on Futures and Options transactions. The tax has been criticized by the Indian financial sector and is currently under review.[40]

Italy

Since March 1, 2013 Italy levies financial transaction tax on qualified equity transactions of up to 0.1% (0.22% in 2013) of the value of the trade. Financial transaction tax on derivatives of qualified equity transactions went into effect on September 1, 2013. The regulation is to apply the tax on the net balance of purchase and sale transactions executed same day on the same financial instrument by the same person/entity.

Japan

Until 1999, Japan imposed a transaction tax on a variety of financial instruments, including debt instruments and equity instruments, but at differential rates. The tax rates were higher on equities than on debentures and bonds. In the late 1980s, the Japanese government was generating significant revenues of about $12 billion per year. The tax was eventually withdrawn as part of "big bang" liberalization of the financial sector in 1999.[41]

Peru

In 2003 the Peruvian government introduced a 0.1% general financial transaction tax on all foreign currency denominated incoming wire transfers regardless of their country of origin, with the aim of raising finance for the education sector. The tax is to be assessed automatically but collected manually.[4]

Poland

Poland charges a 1% Civil Law Activities Tax (CLAT) on the sale or exchange of property rights, which includes securities and derivatives. The tax applies to transactions, which are performed in Poland or which grant property rights that are to be exercised in Poland. It also applies to transactions executed outside Poland if the buyer is established in Poland. All transactions on a stock market, Polish treasury bonds and Polish treasury bills, bills issued by the National Bank and some other specified securities are exempted from the tax.[33]

Singapore

Singapore charges a 0.2% stamp duty payable on all instruments that give effect to transactions in stocks and shares. Generally, there is no stamp duty payable for derivatives instruments. Share transactions carried out on the Singapore Exchange via the scripless settlement system do not attract duty, as there is no instrument of transfer.[33]

Sweden

In January 1984, Sweden introduced a 0.5% tax on the purchase or sale of an equity security. Hence a round trip (purchase and sale) transaction resulted in a 1% tax. In July 1986, the rate was doubled, and in January 1989, a considerably lower tax of 0.002% on fixed-income securities was introduced for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was 0.003%. Analyst Marion G. Wrobel prepared a paper for the Canadian Government in June 1996, examining the international experience with financial transaction taxes, and paying particular attention to the Swedish experience.[42]

The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year. They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million.[43] In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kronor by 1988.[44]

On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.

Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.[42]

The Swedish FTT is widely considered a failure by design since traders could easily avoid the tax by using foreign broker services.[33]

Switzerland

In Switzerland a transfer tax (Umsatzabgabe) is levied on the transfer of domestic or foreign securities such as bonds and shares, where one of the parties or intermediaries is a Swiss security broker. Other securities such as options futures, etc. do not qualify as taxable securities. Swiss brokers include banks and bank-linked financial institutions. The duty is levied at a rate of 0.15% for domestic securities and 0.3% for foreign securities. However, there are numerous exemptions to the Swiss transfer tax. These are among others: Eurobonds, other bonds denominated in a foreign currency and the trading stock of professional security brokers. The revenue of the Swiss transfer tax was CHF 1.9 billion in 2007 or 0.37% of GDP.[33]

Taiwan

In Taiwan the securities transaction tax (STT) is imposed upon gross sales price of securities transferred and at a rate of 0.3% for share certificates issued by companies and 0.1% for corporate bonds or any securities offered to the public which have been duly approved by the government.[33] However, trading of corporate bonds and financial bonds issued by Taiwanese issuers or companies are temporarily exempt from STT beginning 1 January 2010. The Taiwanese government argued this "would enliven the bond market and enhance the international competitiveness of Taiwan's enterprises."[45]

Since 1998, Taiwan also levies a stock index futures transaction tax imposed on both parties. The current transaction tax is levied per transaction at a rate of not less than 0.01% and not more than 0.06%, based on the value of the futures contract. Revenue from the securities transaction tax and the futures transaction tax was about €2.4 billion in 2009. The major part of this revenue came from the taxation of bonds and stocks (96.5%). The taxation of stock index future shares was 3.5%. In total, this corresponds to 0.8% in terms of GDP.[33]

United Kingdom

Stamp Duty

A stamp duty was introduced in the United Kingdom as an ad valorem tax on share purchases in 1808.[46] Stamp duties are collected on documents used to effect the sale and transfer of certificated stock and other securities of UK based companies.[33] It can be avoided using CFDs.

Stamp Duty Reserve Tax

To address the development of trades in uncertificated stock, the UK Finance Act 1986 introduced the Stamp Duty Reserve Tax (SDRT) at a rate of 0.5% on share purchases,[47] raising around €3.8bn per year, of which 40% is paid by foreign residents.[6] The tax is charged whether the transaction takes place in the UK or overseas, and whether either party is resident of the UK or not. Securities issued by companies overseas are not taxed. This means that—just like the standard stamp duty—the tax is paid by foreign and UK-based investors who invest in UK incorporated companies. In other words, the tax applies to all companies which are headquartered in the UK,[33] albeit there is a relief for intermediaries (such as market makers and large banks that are members of a qualifying exchange) as a condition of their obligation to provide liquidity.[48]

Both stamp duty and SDRT remain in place today, albeit with continued relief for intermediaries, so that over 70% of transactions are exempt from tax.[4] SDRT accounts for the majority of revenue collected on share transactions effected through the UK's Exchanges. On average almost 90% of revenues stem from the SDRT. Only a minor part comes from Stamp Duty.[33] Revenue is pro-cyclical with economic activity. In terms of GDP and total tax revenue the highest values were reached during the dot.com boom years around the end of the 20th century, notably in 2000–01. In 2007–08, SDRT generated €5.37 billion in revenue (compared to 0.72 billion of the standard stamp duty). This accounts for 0.82% over total UK tax revenue or 0.30% of GDP. In 2008–09 the figure dropped to €3.67 billion (0.22% of GDP), due to reduced share prices and trading volumes as a result of the financial crisis.[33]

United States

The US imposed a financial transaction tax from 1914 to 1966. The federal tax on stock sales of 0.1 per cent at issuance and 0.04 per cent on transfers. Currently, the US has a very minor 0.0034 per cent tax which is levied on stock transactions. The tax, known as Section 31 fee, is used to support the operation costs of the Securities and Exchange Commission (SEC). In 1998, the federal government collected $1.8 billion in revenue from these fees, almost five times the annual operating costs of the SEC.[41]

Proposed financial transaction taxes

Global Tobin tax

In 2000 a "pro–Tobin tax" NGO proposed that a tax could be used to fund international development: "In the face of increasing income disparity and social inequity, the Tobin Tax represents a rare opportunity to capture the enormous wealth of an untaxed sector and redirect it towards the public good. Conservative estimates show the tax could yield from $150–300 billion annually."[49] According to Dr. Stephen Spratt, "the revenues raised could be used for ... international development objectives ... such as meeting the Millennium Development Goals."[4][50][51]

At the UN World Conference against Racism 2001, when the issue of compensation for colonialism and slavery arose in the agenda, President Fidel Castro of Cuba advocated the Tobin Tax to address that issue. According to Cliff Kincaid, Castro advocated it "specifically in order to generate U.S. financial reparations to the rest of the world", however a closer reading of Castro's speech shows that he never did mention "the rest of the world" as being recipients of revenue. Castro cited holocaust reparations as a previously established precedent for the concept of reparations.[53][54] Castro also suggested that the United Nations be the administrator of this tax, stating the following:

May the tax suggested by Nobel Prize Laureate James Tobin be imposed in a reasonable and effective way on the current speculative operations accounting for trillions of US dollars every 24 hours, then the United Nations, which cannot go on depending on meager, inadequate, and belated donations and charities, will have one trillion US dollars annually to save and develop the world. Given the seriousness and urgency of the existing problems, which have become a real hazard for the very survival of our species on the planet, that is what would actually be needed before it is too late.[53]

Member countries have not given the UN a mandate to seek a global financial tax.

A G20 financial transaction tax (G20 FTT) was first proposed in 2008.[57] The next year the G20 FTT received the support of the US Speaker of the House Nancy Pelosi.[58] The proposal, which was thought to raise new funding for poor countries, however, failed to win the backing of the G20 at 2011 Cannes summit.[59] Nevertheless, French President Nicolas Sarkozy said he planned to still pursue the idea.[59] According to Bill Gates, co-founder of Microsoft and a supporter of a G20 FTT, even a small tax of 10 basis points on equities and 2 basis points on bonds could generate about $48 billion from G20 member states or $9 billion if only adopted by larger European countries.[60]

United States financial transaction tax

Different US financial transaction tax (US FTT) bills have been proposed in Congress since 2009. The main differences between the proposals has been the size of the tax, which financial transactions are taxed and how the new tax revenue is spent. The bills have proposed a .025%–.5% tax on stocks, .025%–.1% tax on bonds and .005%–.02% on derivatives with the funds going to health, public services, debt reduction, infrastructure and job creation. The House of Representatives has introduced since 2009 ten different US FTT related bills and the Senate has introduced four. The bills in the Senate have been variously sponsored by Tom Harkin (D-Iowa) or Bernie Sanders (I-Vermont). The bills in the House have been variously sponsored by Peter DeFazio (D-Oregon), John Conyers (D-Michigan) or a number of other Representatives.[61]

The US FTT bills proposed by Rep. Peter DeFazio (D-Oregon) and Sen. Harkin (D-Iowa) have received a number of cosponsors in the Senate and House. The Let Wall Street Pay for the Restoration of Main Street Bill is an early version of their cosponsored US FTT bill which includes a tax on US financial market securities transactions.[5] The bill suggests to tax stock transactions at a rate of 0.25%. The tax on futures contracts to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price would be 0.02%. Swaps between two firms and credit default swaps would be taxed 0.02%.[62] The tax would only target speculators, since the tax would be refunded to average investors, pension funds and health savings accounts.[63] Projected annual revenue is $150 billion per year, half of which would go towards deficit reduction and half of which would go towards job promotion activities.[5][62] The day the bill was introduced, it had the support of 25 of DeFazio's House colleagues.[5]

European Union financial transaction tax

The EU financial transaction tax (EU FTT) is a proposal made by the European Commission in September 2011 to introduce a financial transaction tax within the 27 member states of the European Union by 2014. The tax would only impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts. According to the European Commission it could raise €57 billion every year,[64] of which around €10bn (£8.4bn) would go to Great Britain, which hosts Europe's biggest financial center.[65] It is unclear whether a financial transaction tax is compatible with European law.[66]

If implemented the tax must be paid in the European country where the financial operator is established. This "R plus I" (residence plus issuance) solution means the EU-FTT would cover all transactions that involve a single European firm, no matter if these transactions are carried out in the EU or elsewhere in the world.[67] The scheme makes it impossible for say French or German banks to avoid the tax by moving their transactions offshore,[68] unless they give up all their European customers.[69]

According to John Dizard of the Financial Times, the unilateral extension of extraterritorial power can only cause problems:- [70]

From a US perspective, this unilateral extension of extraterritorial power by the commission goes beyond anything attempted since the US and Great Britain concluded the Treaty of Paris ending the Revolutionary War in 1783. Most institutions that try to do something like that have their own navy, and usually a larger one than the sovereign territory where they are attempting to impose the tax.

Being faced with stiff resistance from some non-eurozone EU countries, particularly United Kingdom and Sweden, a group of eleven states began pursuing the idea of utilizing enhanced co-operation to implement the tax in states which wish to participate.[71][72] Opinion polls indicate that two-thirds of British people are in favour of some forms of FTT (see section: Public opinion).

Evaluation

Effect on volatility

Proponents of the tax assert that it will reduce price volatility. In a 1984 paper, Lawrence Summers and Victoria Summers argued, "Such a tax would have the beneficial effects of curbing instability introduced by speculation, reducing the diversion of resources into the financial sector of the economy, and lengthening the horizons of corporate managers."[80] It is further believed that FTTs "should reduce volatility by reducing the number of noise traders".[81] However most empirical studies find that the relationship between FTT and short-term price volatility is ambiguous and that "higher transaction costs are associated with more, rather than less, volatility".[81]

A 2003 IMF Staff Paper by Karl Habermeier and Andrei Kirilenko found that FTTs are "positively related to increased volatility and lower volume".[82] A study of the Shanghai and Shenzhen stock exchanges says the FTT created significant increases in volatility because it "would influence not only noise traders, but also those informed traders who play the role of decreasing volatility in the stock market."[83] A French study of 6,774 daily realized volatility measurements for 4.7 million trades in a four-year period of index stocks trading in the Paris Bourse from 1995 to 1999 reached the same conclusion "that higher transaction costs increase stock return volatility". The French study concluded that this volatility measures "are likely to underestimate the destabilizing role of security transactions since they – unlike large ticks – also reduce the stabilizing liquidity supply".[84]

A 1997 study of the UK Stamp Duty, which exempts market makers and large banks that are members of a qualifying exchange, found no significant effect on the volatility of UK equity prices.[81]

Effect on liquidity

In 2011 the IMF published a study paper, which argues that a securities transaction tax (STT) "reduces trading volume, it may decrease liquidity or, equivalently, may increase the price impact of trades, which will tend to heighten price volatility".[85] A study by the think tank Oxera found that the imposition of the UK's Stamp Duty would "likely have a negative effect on liquidity in secondary markets". Regarding proposals to abolish the UK's Stamp Duty, Oxera concluded that the abolition would "be likely to result in a non-negligible increase in liquidity, further reducing the cost of capital of UK listed companies".[86] A study of the FTT in Chinese stock markets found liquidity reductions due to decreased transactions.[83]:6

Effect on price discovery

An IMF Working Paper found a FTT impacts price discovery. The natural effect of the FTT's reduction of trading volume is to reduce liquidity, which "can in turn slow price discovery, the process by which financial markets incorporate the effect of new information into asset prices". The FTT would cause information to be incorporated more slowly into trades, creating "a greater autocorrelation of returns". This pattern could impede the ability of the market to prevent asset bubbles. The deterrence of transactions could "slow the upswing of the asset cycle", but it could also "slow a correction of prices toward their fundamental values".[85]:16,18,21

Habermeier and Kirilenko conclude that "The presence of even very small transaction costs makes continuous rebalancing infinitely expensive. Therefore, valuable information can be held back from being incorporated into prices. As a result, prices can deviate from their full information values."[82]:174 A Chinese study agrees, saying: "When it happens that an asset's price is currently misleading and is inconsistent with its intrinsic value, it would take longer to correct for the discrepancy because of the lack of enough transactions. In these cases, the capital market becomes less efficient."[83]:6

Revenues vary according to tax rate, transactions covered, and tax effects on transactions. The Swedish experience with transaction taxes in 1984–91 demonstrates that the net effect on tax revenues can be difficult to estimate and can even be negative due to reduced trading volumes. Revenues from the transaction tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year but actually amounted to no more than 80 million Swedish kronor in any year. Reduced trading volumes also caused a reduction in capital gains tax revenue which entirely offset the transaction tax revenues.[44]

An examination of the scale and nature of the various payments and derivatives transactions and the likely elasticity of response led Honohan and Yoder (2010) to conclude that attempts to raise a significant percentage of gross domestic product in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. They point out that, although the side effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the ongoing financial crisis. Accordingly, such taxes likely deliver both less revenue and less efficiency benefits than have sometimes been claimed by some. On the other hand, they observe that such taxes may be less damaging than feared by others.

On the other hand, the case of UK stamp duty reserve tax shows that provided exemptions are given to market makers and banks, that FTT can generate modest revenues, at the expense of pensioners and savers. Despite the low tax rate of 0.5% on the purchase of shares, the UK managed to generate between €3.7 and €7.4 billion in revenues from stamp duties per year throughout the last decade.[33] Also the cases of Japan, Taiwan and Switzerland suggest that countries may generate sizable amounts of income by introducing FTT on a national scale. If implemented on an international scale, revenues may be even considerably higher, since it would make it more difficult for traders to avoid the tax by moving to other locations.[87]

Projections of FTT proposals

Worldwide: According to the Robin Hood Tax campaign a FTT rate of about 0.05% on transactions like stocks, bonds, foreign currency and derivatives could raise £250 billion a year globally[88] or £20 billion in the UK alone.[89]

United States: The Center for Economic and Policy Research estimates a US FTT to raise $177 billion per year.[90] The Chicago Political Economy group cites between $750 billion and $1.2 trillion per year (2005–2009).[91][92]

European Union: The European Commission expects its proposed EU financial transaction tax of 0.1% on bond and equity transactions, and 0.01% on derivative transactions between financial firms to raise up to €55 billion per year.[93][94]

Effect on share prices

According to a European Commission working paper, empirical studies show that the UK stamp duty influences the share prices negatively. More frequently traded shares are stronger affected than low-turnover shares. Therefore the tax revenue capitalizes at least to some extent in lower current share prices. For firms which rely on equity as marginal source of finance this may increase capital costs since the issue price of new shares would be lower than without the tax.[33]

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and formerly Chief Economist at the IMF, argues that "Higher transactions taxes increase the cost of capital, ultimately lowering investment. With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost. More broadly, FTTs violate the general public-finance principle that it is inefficient to tax intermediate factors of production, particularly ones that are highly mobile and fluid in their response."[95]

Progressive or regressive tax

An IMF Working Paper finds that the FTT "disproportionately burdens" the financial sector and will also impact pension funds, public corporations, international commerce firms, and the public sector, with "multiple layers of tax" creating a "cascading effect". "[E]ven an apparently low-rate [FTT] might result in a high tax burden on some activities." These costs could also be passed on to clients, including not only wealthy individuals and corporations, but charities and pension and mutual funds.[85]:25,37

Other studies have suggested that the financial transaction tax is regressive in application—particularly the Stamp Duty in the UK, which includes certain exemptions only available to institutional investors. One UK study, by the Institute for Development Studies, suggests, "In the long run, a significant proportion of the tax could end up being passed on to consumers."[81]:3 Another study of the UK Stamp Duty found that institutional investors avoid the tax due to intermediary relief, while short-term investors who are willing to take on additional risk can avoid the tax by trading noncovered derivatives. The study concluded, therefore, "The tax is thus likely to fall most heavily on long-term, risk-averse investors."[85]:36

Technical feasibility

Although James Tobin had said his own Tobin tax idea was unfeasible in practice, a study on its feasibility commissioned by the German government 2002 concluded that the tax was feasible even at a limited scale within the European time zone without significant tax evasion.[96]Joseph Stiglitz, former Senior Vice President and Chief Economist of the World Bank, said, on 5 October 2009, that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted.[25] However, on 7 November 2009, at the G20 finance ministers summit in Scotland, the head of the International Monetary Fund, Dominique Strauss-Khan, said, "transactions are very difficult to measure and so it's very easy to avoid a transaction tax."[97] Nevertheless in early December 2009, economist Stephany Griffith-Jones agreed that the "greater centralisation and automisation of the exchanges' and banks' clearing and settlements systems ... makes avoidance of payment more difficult and less desirable."[98]

In January 2010, feasibility of the tax was supported and clarified by researchers Rodney Schmidt, Stephan Schulmeister and Bruno Jetin who noted "it is technically easy to collect a financial tax from exchanges ... transactions taxes can be collected by the central counterparty at the point of the trade, or automatically in the clearing or settlement process."[99][100] (All large-value financial transactions go through three steps. First dealers agree to a trade; then the dealers' banks match the two sides of the trade through an electronic central clearing system; and finally, the two individual financial instruments are transferred simultaneously to a central settlement system. Thus a tax can be collected at the few places where all trades are ultimately cleared or settled.)[100][101]

When presented with the problem of speculators shifting operations to offshoretax havens, a representative of a "pro–Tobin tax" NGO argued as follows:

Agreement between nations could help avoid the relocation threat, particularly if the tax were charged at the site where dealers or banks are physically located or at the sites where payments are settled or 'netted'. The relocation of Chase Manhattan Bank to an offshore site would be expensive, risky and highly unlikely – particularly to avoid a small tax. Globally, the move towards a centralized trading system means transactions are being tracked by fewer and fewer institutions. Hiding trades is becoming increasingly difficult. Transfers to tax havens like the Cayman Islands could be penalized at double the agreed rate or more. Citizens of participating countries would also be taxed regardless of where the transaction was carried out.[102]

Gradual implementation feasibility

There has been debate as to whether one single nation could unilaterally implement a financial transaction tax. In the year 2000, "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement [to implement the tax] by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading."[102] However, on 27 June 2010 at the 2010 G-20 Toronto summit, the G20 leaders declared that a "global tax" was no longer "on the table", but that individual countries will be able to decide whether to implement a levy against financial institutions to recoup billions of dollars in taxpayer-funded bailouts.[103]

Estonia: In December 2011, Estonian prime minister Andrus Ansip said his country was prepared to support a FTT "if it increases the stability of the financial system and prevents competition distortions."[107]

Ireland: Ireland is in favour of EU-wide FTT, but not supporter of a Eurozone FTT.[115]

Italy: In January 2012, new Italian prime minister Mario Monti said Rome had changed tack and now backed the push for a financial transaction tax, but he also warned against countries going it alone.[116]

Luxembourg: In December 2011, prime minister of Luxembourg, Jean-Claude Juncker backed an EU-FTT, saying Europe can't refrain from "the justice that needs to be delivered" out of consideration for London's financial industry.[117]

Netherlands: In October 2011, Dutch prime minister Mark Rutte said his cabinet supports a FTT but opposes an introduction in only a few countries.[118]

Venezuela: The president of Venezuela, Hugo Chávez supports a FTT in 2001.[122] In 2007 Chávez proposed a regional FTT for Latin America together with former Argentinian president Nestor Kirchner.[104]

Other supporters

Over 1,000 economists (including special drawing rights for the purpose of providing international assistance, without necessarily dismissing the Tobin tax idea.[29] It has been widely reported that the Pope backs such a tax. However, the reality is that a commission of the Vatican of which the Pope is not a member merely said that such a tax would be worth reflecting on.[130]

Another group of EU FTT supporters it is integrated by European federalists. In their opinion FTT would constitute, among other things, a fair political initiative in the current financial crisis and it would represent an EU added value.

The European Commission has proposed a regional FTT to be implemented within the European Union (or the Eurozone) by 2014.[131]

Opposing countries

Canada: Paul Martin, Canadian Finance Minister opposes a FTT in 1994.[132] On 23 March 1999 the Canadian House of Commons passed a resolution directing the government to "enact a tax on financial transactions in concert with the international community".[102][133] However, in November 2009, at the G20 finance ministers summit, the representatives of the minority government of Canada spoke publicly on the world stage in opposition to the resolution.[97][102] Canada's finance minister, Jim Flaherty, restated Canada's opposition to a Tobin tax, saying: "It is not something we would be interested in in Canada. We are not in the business of raising taxes, we are in the business of lowering taxes in Canada. It is not an idea we would look at."[134]

People's Republic of China: China opposes the tax because it may add more burdens on domestic banks.[120]

Great Britain: The British government supports FTT only if implemented worldwide. In 2009, Adair Turner (chair) and Hector Sants (CEO) of the UK Financial Services Authority both supported the idea of new global taxes on financial transactions.[135][136][137] On the other hand, the Bank of England strongly opposes a FTT. Its governor Mervyn King dismissed the idea of a "Tobin tax" on 26 January 2010, saying: "Of all the components of radical reform, I think a Tobin tax is bottom of the list ... It's not thought to be the answer to the 'Too Big to Fail' problem—there's much more support for the idea of a US-type levy."[138]

India: India remains opposed to a global FTT. A senior Finance Ministry official argued that the proposed tax would put an additional burden on the domestic banking system.[120]

Sweden: Sweden opposes a FTT if it is applied only in the European Union.[139]

United States: The US Secretary of the Treasury Lloyd Bentsen initially supported a FTT in 1994.[132] In 2004, Representative Chaka Fattah of Pennsylvania introduced a bill in the US House of Representatives (H.R. 3759)[140] that would require a study to reform the Federal tax code through eliminating federal income tax and replacing it with a transaction fee-based system. In 2010 he introduced the "Debt Free America Act" (H.R. 4646),[141] that goes further and proposes to enact a 1% FFT and eliminate federal income tax. Both bills never made it out of committee.[142] On 24 September 2009, Paul Volcker (former US Federal Reserve chairman) "said he was 'very interested' by ideas for a tax on transactions between banks".[143] On 3 December 2009, 22 representatives in the United States House of Representatives supported the "Let Wall Street Pay for the Restoration of Main Street Bill", which contained a domestic financial transaction tax.[63] On 7 December 2009, Nancy Pelosi, Speaker of the United States House of Representatives stated her support for a "G-20 global tax".[58] However, already on 6 November 2009, US Treasury Secretary Timothy Geithner, following UK Prime Minister Gordon Brown's call for a global FTT, expressed US opposition to the proposal saying: "A day-by-day financial transaction tax is not something we're prepared to support".[144] Instead Geither favors an ongoing levy charged against large banks.[145] On 13 December 2009, Paul Volcker, chairman of the US Economic Recovery Advisory Board under President Barack Obama, said he "instinctively opposed" any tax on financial transactions. "But it may be worthwhile to look into the current proposals as long as the result is not predetermined. That would at least end all this renewed talk about the idea, but overall I am skeptical about these ideas."[146] By 2011, Volcker was more open to the idea of a transaction tax as a means to slow down trading.[147]
According to Ron Suskind, the author of "Confidence Men", a book based on 700 hours of interviews with high-level staff of the US administration, President Obama supported a FTT on trades of stocks, derivatives, and other financial instruments, but it was blocked by Obama's former director of the National Economic CouncilLarry Summers.[148]

Other opposers

Most hedge funds managers fiercely oppose FTT.[129] So does the economist and former member of Bank of England [151]

IMF's position

In 2001, the IMF conducted considerable research that opposes a transaction tax.[152] On 11 December 2009, the Financial Times reported "Since the Nov 7 [2009] summit of the G20 Finance Ministers, the head of the International Monetary Fund, Mr Strauss-Kahn, seems to have softened his doubts, telling the CBI employers' conference: 'We have been asked by the G20 to look into financial sector taxes. ... This is an interesting issue. ... We will look at it from various angles and consider all proposals.'"[153] When the IMF presented its interim report[21][22] for the G20 on 16 April 2010, it laid out three options: a bank tax, a Financial Activities Tax (FAT), and a third option (which was not promoted but not ruled out), a financial transaction tax.[101] On 16 April 2011, the IMF stated, it does not endorse a financial transaction tax, believing it "does not appear well suited to the specific purposes set out in the mandate from the G-20 leaders".[21] However, it concedes that "The FTT should not be dismissed on grounds of administrative practicality".[21]

Challenging the IMF's belittling of the financial transaction tax, Stephan Schulmeister of the Austrian Institute of Economic Research found that, "the assertion of the IMF paper, that a financial transaction tax 'is not focused on the core sources of financial instability', does not seem to have a solid foundation in the empirical evidence."[154] Additionally, the IMF's watchdog group, the Independent Evaluation Office (IEO), released a report in 2011 which questioned the quality and level of bias in the IMF's research between 1999 and 2008. The report indicated that "there is a widely held perception that IMF research is message driven. About half of the authorities held this view, and more than half of the staff indicated that they felt pressure to align their conclusions with IMF policies and positions."[155]

Public opinion

Europe

A survey published by YouGov suggests that more than four out of five people in the UK, France, Germany, Spain and Italy think the financial sector has a responsibility to help repair the damage caused by the economic crisis.[156] A recent Eurobarometer poll of more than 27,000 people published in January 2011 found that the European public "strongly support the various measures that the European Union could adopt to reform the global financial markets... about the introduction of a tax on financial transactions, this proposal is nevertheless supported by more than six out of ten respondents (61%). A quarter of Europeans are against it, possibly because of the fear that they themselves might be subject to this tax."[156][157] It further notes: "Countries are far more divided on the question of the introduction of a tax on financial transactions: in some Member States, a majority of respondents even oppose such a tax, in particular in Malta (30% in favour versus 46% against) and the Netherlands (36% versus 53%). Respondents in Sweden (45% versus 46%) and the United Kingdom (43% versus 41%) are evenly divided."

^Marcos Cintra (July 2009). "Bank transactions: pathway to the single tax ideal. A modern tax technology;the Brazilian experience with a bank transactions tax (1993–2007)". University Library of Munich, Germany in its series MPRA Paper with number 16710.

^Akst, Daniel (2 February 2003). "ON THE CONTRARY; Dreaming Out Loud: One Tiny Little Tax". The New York Times.

^Kwan S. Kim and Seok-Hyeon Kim (December 2003). "The Tobin tax revisited in the context of global governance on capital markets". The Role of International Institutions in Globalization: The Challenges of Reform (edited by John-ren Chen). Edward Elgar Publishing. p. 30.

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